Wednesday, May 31, 2006

Courtesy of Bruce Bartlett, here is a link to a pdf file of the just-released Treasury study of the dynamic growth effects of the tax reform plans reduced last year to zero acclaim by the Tax Reform Panel.

The good news (leaving aside that none of the plans has a chance of being adopted): the Panel's "Growth and Investment Tax" (GIT) ostensibly would raise national income, over the long run, by somewhere in the range from 1.4% to 4.8%. A straight-up progressive consumption tax ostensibly would do so by 1.9% to 6%. For the Simplified Income Tax (SIT), the predicted growth in national income was only 0.2% to 0.9%, but hey, that's better than nothing.

Bad news item #1: Since the plans are revenue-neutral relative to the Administration's budgetary baseline (present law minus all of the tax cut phase-outs and plus a number of unenacted Bush tax cut proposals), they might very well reduce national income relative to present law (with the phase-outs and no new tax cuts), since they result in a fiscal gap that is trillions of dollars higher.

Bad news item #2: I suspect that the models over-estimate the effects on the capital stock and economic growth of shifting from an income tax to a consumption tax. My reason for suspecting this is technical, rather than reflecting some personal hunch about saving behavior. The recent literature suggesting that income taxation and consumption taxation differ only in their treatment of the real riskless interest rate implies that the two systems are more alike than we have long thought. The real riskless rate has typically been in the 1 to 3% range, whereas the risky rate that I suspect the Treasury models use in predicting behavioral responses is much higher. To my knowledge, economic models generally have not incorporated this point as fully as perhaps they ought. The riskless rate point should also lower estimates of the deadweight loss resulting from inter-asset differences in cost recovery rate. But permanent gaps in the tax base, such as the exclusions of imputed rental income and various fringe benefits, are not directly affected by the change in thinking about timing issues.

One reason I suspect this is the magnitude of the growth rate differences attributed to the GIT versus the SIT. Even leaving aside that the former is partly an income tax while the latter is partly a consumption tax, the significance attributed to the timing point seems (admittedly at a casual glance) rather high, especially when compared with the SIT versus present law. Many economists, including for example Glenn Hubbard, have argued in print that the inter-asset distortions in the tax law are more important than the income vs. consumption tax choice, but the Treasury's dynamic analysis seems to come out the other way. Sure, theory should give way to empirics, but what we have here are estimated empirics that are themselves based on a theory.

Tuesday, May 30, 2006

Bush has just named Henry Paulson, the chairman of Goldman Sachs, to replace poor pitiful John Snow as the Treasury Secretary. Past Goldman Sachs chiefs to figure on the national scene include Robert Rubin and Jon Corzine, obviously formidable players.

It's a mystery to me why a person with such a high-powered job would want to be the Treasury Secretary at a time like this.

According to the New York Times, "Republicans had long been pushing for a change at Treasury, arguing that Mr. Snow, despite devoting much of his energy to making the case that the economy had flourished under Mr. Bush, had failed to convince the public at large. Mr. Paulson is known as an ardent and engaging salesman."

That undoubtedly is what the Bush Administration wants him for, since salesmanship is all they ask of a Treasury Secretary (Rove handles the actual economics). Raising, of course, the question of what Paulson thinks he is doing. No doubt they promised him more than this, but why would he believe them? (Or think they could deliver, at this point, even if they were so minded?)

Chuck Schumer is happy, praising Paulson's "experience, intelligence and deep understanding of national and global economic issues." Unfortunately, this is about as relevant to the responsibilities they are likely to give Paulson as the statement in the Times that he prefers birdwatching to playing golf.

UPDATE: The best phrase I've seen about this is that the Bush Administration was so desperate that they resorted to scraping the top of the barrel.

Friday, May 26, 2006

It's hilarious to see Bush "admitting mistakes" at this late date. The only personal mistake he admits is using tough guy language on a couple of occasions ("bring it on," "dead or alive" ) three and five years ago. But that's apparently behind us now, since he tells us he has learned about "expressing myself maybe in a little more sophisticated manner."

How nice for him to get that off his chest. I won't add anything about the "more sophisticated" bit, although my twelve and ten year old kids thought it was hilarious coming from Bush. Too easy a target.

Wednesday, May 24, 2006

Having noticed that Bush has twice in the last month (on 5/1 and 5/22) hailed developments in Iraqi politics as "turning points" in the war there, I thought I'd try to find out just how many turning points there have been. So I did a couple of quick Lexis searches, restricted to the New York Times and the Washington Post. It turns out that, in addition to turning points, there have also been quite a few "milestones." In particular:

July 2003: formation of temporary governing council is an "important milestone."

June 2004: the handover of sovereignty is a "turning point."

January 2005: Iraqi elections were both a "turning point" and a "milestone."

August 2005 and/or October 2005 (not sure if one date is wrong, or, if both are right, whether they relate to different stages): adoption of Iraqi constitution and/or progress towards adoption thereof were "milestones."

December 2005 - Iraqi parliamentary elections were a "major milestone."

Then most recently we have 5/1/06 and 5/22/06, both involving "turning points" that I believe were not exactly the same.

Tuesday, May 23, 2006

I've finished the third book in the very loosely related trilogy by J. T. Farrell about British imperial decline (Troubles, Siege of Krishnapura, Singapore Grip) and highly recommend it. But in Singapore Grip I thought the anti-colonialist satire was at times a bit overdone. Flawless touch in the first two books, however.

Then I read Richard Condon's The Manchurian Candidate (basis for the 1962 movie that spawned a recent update) - a real hoot and great paranoid fun.

Now I'm reading Daniel Dennett's Breaking the Spell, about religion as an evolutionary phenomenon. I'm finding it a bit too pop in style, and too engaged in laboriously meeting objections to the enterprise that I don't have. Dennett is doing this in the hope of having a bigger impact rather than just preaching to the choir, a worthy goal but one I doubt he'll meet, but in doing so he's certainly weakening the book's appeal to choir members such as me.

At work I'm making great strides on an article I rather like so far, "Permanent Income and the Annual Income Tax," about the use of lifetime versus shorter-term measures of wellbeing in fiscal rules such as taxes and transfers. The summer comes early for legal academics who start teaching in late August, but that's not to say too early.

Saturday, May 20, 2006

I was in Washington for the spring meeting of the National Tax Association this past Thursday, and the lunch talk was given by Ed Lazear, the labor economist and recent Tax Reform Panel member who is now on Bush's Council of Economic Advisors. Though I realize the job puts pressure on one's public utterances, I was dismayed by the level of sales pitch that I was hearing, all this stuff about how the Administration's tax policy has wonderfully boosted economic growth, increased national saving, etc., etc. E.g., attributing the recent economic growth rate to the tax cuts, rather than to the recessionary trough that the growth came from, and not acknowledging the fairly obvious point that there were also high growth rates after the 1993 tax increases. Claiming that the dividend tax cuts will create vast increases in national saving and economic growth, as predicted by economic theory, blah blah blah.

With no ill will towards Lazear, I must say I found it a bit stomach-turning, even more so than the cardboard cheesecake with raspberry sauce that was sitting in front of me. So I waved my hand like a first grader so I would get to ask the first question, and was I suppose a bit blunt. I noted that economic theory can't predict the consequences of a tax cut in isolation; it needs to be a balanced-budget exercise that includes the offset. I noted that the Administration has vastly increased the fiscal gap, with huge likely negative effects on national saving even if there is no catastrophe. I noted the immense transfers to older generations, from unsustainable tax cuts that will have to be reversed later on plus the Medicare prescription drug benefit, likely to reduce national saving due to the income effect (seniors save less than younger people for lifecycle reasons). Maybe I had one or two more points before I subsided and let Lazear have at it.

I wouldn 't say he answered me, though I can't say I blame him. At some point he started saying something about how, with just a little economic growth, all the deficits will totally disappear. This was a bit thick. So I started to cut in: "There isn't a single reputable expert in the country who believes - "

"I've got the floor now!" was his answer, so I subsided again. He did acknowledge sharing some of my concerns.

No hard feelings, but a job in the Council of Economic Advisors really isn't very good for one's reputation these days.

UPDATE: A Washington Post editorial on Lazear's speech said it all: "Down Is Still Up; The White House continues to tax reality."

Monday, May 15, 2006

"The Bushies will tell you that it is dangerous and even against the law to inquire into these nefarious activities. We just have to trust the king.

"Well, I give you fair warning. This is a road map to totalitarianism. Hallmarks of totalitarian regimes have always included an excessive reliance on secrecy, the deliberate stoking of fear in the general population, a preference for military rather than diplomatic solutions in foreign policy, the promotion of blind patriotism, the denial of human rights, the curtailment of the rule of law, hostility to a free press, and the systematic invasion of the privacy of ordinary people."

Friday, May 12, 2006

Upon reflection (and with thanks to Kirk Stark for nudging me to see it this way), I am disappointed with Congress's lack of imagination in using tax cuts to "pay" for tax cuts, via the IRA conversion rule that raises $6 billion over ten years but increases the fiscal gap by $16.6 billion. Why stop there?

Here's an idea. Take people who are newly graduated from law school or medical school. They might easily have expected career earnings with a present value of, say, $10 million, and expected lifetime income tax liabilities under present law with a present value of, say, $3 million. The income and liabilities are mostly back-loaded, since their earnings would be expected to rise over time. So here's what we do. We let them "prepay" $50,000, which the government will be happy to lend them for 9-1/2 years at zero interest. All who "prepay" are totally exempt from any further income tax liability for the rest of their lives, starting in 10 years. Leaving aside the credibility problems, what a great revenue raiser within the budget window!

Thursday, May 11, 2006

I noted in the previous post that the latest tax cuts passing through Congress "raise revenue" to offset a tiny portion of the overall tax cuts by actually losing more revenue, the device being to hurt the government's long-term financing by paying people to convert traditional IRAs into Roth IRAs.

Len Burman at the Urban Institute has the details. The IRA provision in the legislation is scored as a $6.4 billion revenue-raiser over the next ten years. But its estimated long term revenue consequence, in present value terms, is a loss of $16 billion.

Corporate executives who did this sort of thing would go to jail. Come to think of it, there's a pretty good chance that a lot of the people behind this brilliant initiative will end up going to jail, albeit for different reasons.

One last amusing detail: the tax-cutting legislation is entitled the "Tax Increase Prevention and Reconciliation Act." First you put in phony sunsets that hold down the revenue estimates. Then you call extending the tax cuts "Tax Increase Prevention." Then you do it again, since the extension is only for 2 years.

"Orwellian" has become such a cliche - how can we freshen it up when it is needed so regularly?

Tuesday, May 09, 2006

First the good news: Bush plans to name Eric Solomon the Assistant Secretary of the Treasury for Tax Policy. Solomon, one of the few people I can think of to serve under both the Clinton and Bush Administrations without having a set term, is one of the good people in government. My guess is that more political people didn't want the job or had confirmation issues or both.

The bad news is that the Republicans in Congress have agreed to a $70 billion tax cut bill. That's $70B over two years - it's just temporary extenders of reduced capital gains and dividend rates and AMT relief. So it brings us a larger fiscal gap and only a tiny respite from the nightmare the Republicans caused in 2001 and 2003 with all of their dishonest, rent-extracting phaseouts of new provisions. (Rent-extracting because they make their fat-walleted friends keep lobbying them for extension.)

One way they are going to "pay" for keeping the hit at "only $70B is to lose money for the government over the long run by inducing people to shift from traditional IRAs (deduction upfront, inclusion on the backend) to Roth IRAs (no deduction today, ostensibly no inclusion upon withdrawal). The myopia of a 2-year budget window permits them to present this long-term revenue-losing shift (since people have to be compensated to switch) as revenue raising. So it is as dishonest and irresponsible as most other things in recent tax legislation, if not more so.

Worse news still is that, to keep this at $70B and keep more tax cuts coming in the future, they deliberately left out "extenders" with strong and bipartisan political support, such as the research and development credit. That way, they get to cut taxes still more later on.

Bush I expect to hail this while at the same time grandstanding about how demanding a $20B cut (over 5 years?) in a pork barrel spending bill makes him a deficit hawk.

Monday, May 08, 2006

Elizabeth Bumiller, the NY Times White House correspondent, aroused my ire last week when her account of the White House Correspondents Dinner mentioned Bush's "comedy" routine but omitted any mention of Colbert.

Today, Bumiller does a little better in her article, "His Legacy and His Library Occupy Bush's Thoughts."

This one at least has a non-lapdog subtext, as in the statement that "Two and a half years before he leaves office, with his popularity at record lows, Mr. Bush is actively thinking ahead to his post-White House life." In other words, to add my own gloss, perhaps he is as eager for his term to end as I am. (Well, he couldn't possibly be AS eager.) That would at least show good judgment.

But I loved this bit:

"'I would like to leave behind a legacy or a think tank, a place for people to talk about freedom and liberty, and the de Tocqueville model, what de Tocqueville saw in America,' Mr. Bush told Mr. Schieffer. 'I would like for there to be a place where young scholars come and write and think and articulate and opine and teach.'"

The jokes here practically write themselves. "Freedom and liberty" is truly an amazing focus, coming as it does from the principal proponent of torture and domestic authoritarianism in U.S. history. De Tocque - who?? No way on earth that Bush has actually heard of him. And yes, scholarship, what a natural legacy for this guy, almost as apt as freedom and liberty.

Monday, May 01, 2006

In case anyone who's interested hasn't seen it yet, here is the link for the amusing Glenn Hubbard video made by students at the Columbia Business School. Suitable for viewing by anyone who knows (or is told) that Glenn reputedly was a candidate for Alan Greenspan's job before it went instead to Ben Bernanke.

But, turning to the Colbert video, words fail me. Give him a Pulitzer Prize for this, throw in the Nobel Peace and Literature Prizes, and it would still fall far short of doing his achievement full justice.

Sometimes, when people get books they think may talk about them, the first thing they do is look in the index under their own names. I'm not among these people, but only because I don't expect to figure in indices other than for an occasional scholarly cite.

Today, I got a complimentary copy, from Doubleday, of Matthew Continetti's newly published "The K Street Gang." Perhaps they're hoping I'll mention it in my blog or something. Anyway, I went straight to the index - not for myself, of course, but for Grover Norquist. I was not disappointed. Entries in 3 sub-categories: "ideology," "Indian gaming interests and," "rogue or bogus clients."

The balance between these sub-categories sounds just about right for Grover.

About Me

I am the Wayne Perry Professor of Taxation at New York University Law School. My research mainly emphasizes tax policy, government transfers, budgetary measures, social insurance, and entitlements reform. My most recent books are (1) Decoding the U.S. Corporate Tax (2009) and (2) Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (2006). My other books include Do Deficits Matter? (1997), When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (2000), Making Sense of Social Security Reform (2000), Who Should Pay for Medicare? (2004), Taxes, Spending, and the U.S. Government's March Towards Bankruptcy (2006), Decoding the U.S. Corporate Tax (2009), and Fixing the U.S. International Tax Rules (forthcoming). I am also the author of a novel, Getting It. I am married with two children (boys aged 16 and 19) as well as four (!) cats. For my wife Pat's quilting blog, see Patwig’s Blog.